Good day, ladies and gentlemen, and welcome to the Gartner Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we'll conduct a question and answer session and instructions will follow at that time. Please note that today's call is being recorded. I would now like to introduce your host for today's conference, David Cohen, Gartner's GVP of Investor Relations.
Mr. Cohen, you may begin.
Thank you, Sarah, and good morning, everyone. We appreciate you joining us today for Gartner's second quarter 2019 earnings call. With me today are Gene Hall, Chief Executive Officer and Craig Safian, Chief Financial Officer. This call will include a discussion of second quarter 2019 financial results and our current outlook for 2019 as disclosed in today's press release. In addition to today's press release, have provided a detailed review of our financials and business metrics in an earning supplement for investors and analysts.
We have posted the press release and the earning supplement on our website investor. Gartner.com. Following comments by Jean and Craig, we will open up the call for your questions. We ask that you limit your questions to one and a follow-up. On the call, unless stated otherwise, all references to revenue and contribution margin are for adjusted revenue and adjusted contribution margin.
Which exclude the deferred revenue purchase accounting adjustments and the 2018 divestitures. All references to EBITDA are for adjusted EBITDA the adjustments as described in our earnings release and excluding the 2018 divestitures. All cash flow numbers unless stated otherwise or as reported with no adjustments related to the 2018 divestitures. All growth rates in Gene's comments are FX neutral unless stated otherwise. And our discussion of global business sales were GBS, we will refer to the GXL products.
These are the products for business leaders across the enterprise. Gartner for marketing leaders is GML, Partner for Finance Leaders is GFL and so on. In aggregate, we refer to these products for business Leaders as GXL. Reconciliations for all non GAAP numbers we use are available in the Investor Relations section of the gartner.com website. Finally, all contract values and associated growth rates We discuss are based on 2019 foreign exchange rates.
As set forth in more detail in today's earnings release, certain statements made on this call may constitute forward looking statements Forward looking statements can vary materially from actual results and are subject to a number of risks and uncertainties, including those contained in the company's 2018 Annual Report on Form Ten K and quarterly reports on Form 10 Q as well as in other filings with the SEC and encourage all of you to review the risk factors listed in these documents. Now, I will turn the call over to Gartner's Chief Executive Officer, Gene Hall. Good morning
and thanks for joining us. The second quarter of 2019, we continue to deliver strong performance performances across our business. Total revenues were up 12% fueled by double digit growth in each of our business segments, research, conferences and consulting. We continue to make significant global impact through these segments. We help more than 15,000 enterprise clients in more than 100 countries around the world with their mission critical priorities while providing great jobs to more than 16,000 associates globally.
Research, our largest and most profitable segment is the core of our value proposition. Our research business was up 10% over this time last year. The Gartner formula for sustained double digit growth drives our success in our research business. As we previously highlighted, the Gartner formula consists of indispensible insights, exceptional talent, sales excellence, and enabling infrastructure For each of these elements, we drive relentless, globally consistent execution of best practices and continuous improvement innovation. Global Technology Sales or GTS serves leaders and their teams within IT.
This group represents more than 80% of our total research contract value. GTS contract value growth was 14% year over year. We delivered double digit growth in every region across every size company and in virtually every industry. Global Business Sales or GBS serves leaders and their teams beyond IT and represents about 20% of our total research contract value. This includes supply chain and marketing, which we've addressed for several years as well as other major enterprise roles, including HR, finance, legal, sales and more.
GBS continued on a path towards double digit growth with total GBS contract value accelerating to 1%. Our GXL product line continued to gain momentum with contract value increasing $20,000,000 sequentially. GXL products provide greater value to clients because they're tailored to the client's individual needs. This in turn results in higher prices per user and stronger retention. Beyond better pricing retention, GXO products provide exponentially more growth opportunities because we can sell these high value 71% year over year and new business was up 51%.
We continue to expect double digit contract value growth in GBS by the end of the year. Our Conferences segment also delivered a terrific performance in Q2, with double digit revenue growth of making every conference we produce the most important gathering for the executives we serve. We continue to invest in our conferences portfolio. In GTS, we expanded our flagship conference, Gartner IT Symposium. We held an IT Symposium conference in Canada, which exceeded performance expectations.
In GBS, we to build out our conference portfolio to align to the GBS roles we serve. In June, we launched the Gartner CFO And Finance Executive Conference. This program featured strategic guidance on the trends at Shape Finance, company performance and personal leadership. Have participants the opportunity to connect with peers and talk one on one with thought leaders. This conference had great attendance with 63% of attendees at the CFO or VP level.
Over time, we'll launch additional conferences to port the other functions in GBS. In addition to all that, we'll continue growing the Evanta business. Our Consulting segment also achieved double digit growth in Q2 with revenues up 10%. Gartner Consulting is an extension of partner research and provides clients a deeper level of involvement through extended project based work to help them execute their most strategic initiatives. Our growth in the quarter was a combination of our labor based business, and strength in our contract optimization business.
As you'll hear from Craig, we've adjusted our guidance for the rest of the year. These changes are driven by 2 factors: a modest reduction in expected revenues and a modest increase in expected costs. The revenue change was driven by 2 factors as well: first, lower non subscription research revenue than expected. Within our research segment, we have some non subscription based products, many of which are legacy. 1 of our strategic priorities is emphasizing subscription based research offerings compared to non subscription based offerings.
In Q2, our non subscription based revenues were lower than expected and we expect this to affect our revenues forecast subscription revenue. While very strong, our contract value growth is modestly below our plan set out at the start of the year. There are a number of drivers that are individually minor, but in aggregate have an impact. These items included a larger than usual number of sales leader changes in GTS expanded deployment of sales teams into our Dallas and Barcelona offices and changes to our selling approach for very small tech companies. The second major factor driving our adjusted guidance is a modest increase in costs, as we were more successful than expected in filling open sales territories.
Sales territories become open through a combination of planned growth promotions, lateral moves within Gartner, salespeople leaving the business. Once the salesperson gives notice that they're leaving, takes about 3 months to hire replacement and another 6 weeks to train them before they get into territory. It can take longer in some countries or when specialized skills are needed. Now we sell less in a sales territory with no salesperson than one that has a salesperson. So one of our priorities minimize the time sales territories are open.
We made significant progress last year. We exceeded our expectations again this year expect this trend to continue. For example, in one of our sales organizations, we planned for 6% open territories and are achieving 2%. Over time, these additional sales people will come up to speed, which will lead to higher sales. In the near term, we incur higher than planned costs.
These include compensation, recruiting, training and technology. As a result, we're expecting our SG and A for the rest of the year to be higher than originally planned with the payoff in incremental sales being realized in 2020. So we've adjusted our guidance to reflect a modest production revenues combined with a modest increase in costs. Looking ahead we are well positioned for sustained double digit growth. We expect continued to sustain double digit growth in GTS.
We're at an inflection point in GBS We've invested to get GBS on a growth trajectory to realize the incredible market potential. In Q2 contract value growth accelerated and we expect continued acceleration. Going forward, we expect to get a strong return on the investments we've made in GBS, which GBS contributing to both higher research contract value growth and increasing profits. And of course, conferences consulting are on strong path. Looking ahead to 2020 with the great strategic positioning of GTS and GBS, Together with leveraging the investments we've made, we expect double digit top line growth and EBITDA growing approximately in line with revenues.
With that, I'll hand the call over to Craig.
Thank you, Jim and good morning everyone. Global Technology Sales the largest part of our Our strategy to deliver products and services with a compelling value proposition across all enterprise functions is working. Conferences and consulting are having outstanding years. This year, we are completing a period of above trend investments across our business positioning us for sustained long up 9% on a reported basis and 12% on an FX neutral basis. The product retirements we discussed last quarter impact the top line growth rate by about 130 basis points.
In addition, contribution margin was 64%. Up 39 basis points from the prior year. EBITDA was $185,000,000, up 1% year over year and 4% FX neutral, slightly above our expectations. Adjusted EPS was $1.45 with meaningful help from tax. And free cash flow in the quarter was $197,000,000.
Our research business had a strong quarter. Research revenue grew 8% in the 2nd quarter and 10% on an FX neutral basis. 2nd quarter contribution margin was 69%. Total contract value was $3,200,000,000 at June 30. FX neutral growth of 11% versus the prior year.
I'll now review the details contract value increased 14% versus the prior year. GTS had contract value of $2,600,000,000 on June 30. Representing just over 80% of our While retention for GTS was 105 percent for the quarter, up 25 basis points year over year. The combination of the client and wallet retention rates show how our clients spend more with us each and every year reinforcing the value we provide to clients. GTS new business increased 4% versus the second quarter of last year, which had a very strong new business had very strong new business growth.
New business is coming from a mix of new enterprises and growth in existing enterprises through sales of additional services and upgrades. The third quarter pipeline is strong. Up 3% compared to Q2 twenty eighteen. The average contract value for enterprise also continues to grow. It now stands at $203,000 for enterprise and GTS, up 10% year over year.
As we discussed previously, we continue to invest in GTS. The investments in headcount growth and improving productivity are driving the GTS acceleration you have seen over the course of 2018 and into the first half of twenty nineteen. At the end of the second quarter, we had 3207 quota bearing associates GTS or growth of 14%, reflecting our planned growth and the better than expected reduction in our open territories. For GTS, the year over year net contract value increase or NCVI divided by the beginning period quota bearing headcount was $110,000
end. Turning
to global business sales. GBS contract value was $602,000,000 at the end of the second quarter or about 20% of total contract value. CV returned to growth, increasing 1% year over year. Many of our GBS metrics continue to be affected by the discontinuation in 2018 of sales of the largest legacy products. As we described the last couple of quarters, the discontinuations were based on a purposeful strategy that allows our sales team to focus on GXL products going forward.
GXL products continue to gain share and are an important part of our strategy. Looking at total contract value from the GXL products, we drove an FX neutral increase of 71% year over year from 133,000,000 $228,000,000. Similar to the last two quarters, on page 11 of the earnings supplement, we provided a bridge from the first quarter to 2nd quarter. We sold $29,000,000 of GXL new business in Q2, up 51% versus the prior year quarter. We continue to make great progress with our GXL products across each of the functions GBS serves.
More than half of the GXL new business in the quarter came from newly launched products. GXL CV now makes up 38% of our attrition is close to 30%, GXL attrition is around 20%, almost at GTS levels. We reduced attrition levels through improving client engagement We are driving increased client engagement through expanded service teams and growing adoption of individualized content For the standalone quarter, we drove attrition rates down for GBS. For contracts that were up for renewal in the 2nd quarter, attrition improved by about 2 seventy basis points over the prior year quarter. Again, this is a result of the increased engagement we've discussed and all of our other retention programs having an impact.
We continue to expect to achieve double digit CV growth in GBS by the end of this year. The combination of improving attrition and corresponding retention rates and continued ramping of GXL new business are the metrics that will get us there. At the end of the second quarter, we had 919 quota bearing associates in GBS. Or growth We have made significant investments in GBS in sales as well as in research, products and services. With the investments we have made and those contemplated in our guidance, we are well positioned to see the benefits as we move into 2020.
In Conferences, revenues increased by 27 percent year over year in Q2 to $141,000,000. FX neutral growth was 29%. 2nd quarter contribution margin was 57%, up slightly from the same quarter last year. We had very strong growth from GBS conferences, including marketing and supply chain. As Gene mentioned, we also had a very successful launch of our first conference for finance leaders.
And Evanta continues to grow over 20%, a significant improvement from before we owned it. We had 27 destination conferences in the same quarter. On a same conference, FX neutral basis, revenues were up 21% with an 18% increase in attendees. The second quarter is typically our 2nd largest quarter after increased by 7% to $104,000,000. FX neutral growth was 10%.
Consulting contribution margin was 33% in second quarter. Labor based revenues were $79,000,000, up 3% versus Q2 of last year or 5% on an FX neutral basis. Labor based billable headcount of 773 was up 9%. Utilization was 63%. Backlog at June 30 was $110,000,000, up 7% year over year on an FX neutral base Our pipeline for the second half of the year remains strong.
Contract optimization revenues were up 27% versus the prior year quarter. As we have detailed in the past, this part of our this part of the Consulting segment is highly variable. SG and A increased 13% year over year in the 2nd quarter or 16% on an FX neutral basis. We continue to grow sales capacity and the enabling infrastructure to support our strategy of delivering sustained double digit growth over the long term. Enabling infrastructure includes investments in human resources functions like recruiting and in real estate to support our increased number of associates around the world.
As we discussed at Investor Day, our largest dollar investments are in GTS, where we have seen strong growth in contract value and higher productivity. Our continuing investments in GCS, the Conferences sales team, have been driving faster growth in that segment. GBS investments are also continuing and we expect to see contract value acceleration this year and going forward, which will drive a return on the investments we've been making. Across all of our sales teams, we were investing to increase territories to reduce open roles and to drive improvements in sales productivity. Adjusted EBITDA for the second quarter was $185,000,000, up 1% on a reported basis and 4% on an FX neutral basis.
EBITDA was adversely affected by about 5 percentage points. Or $7,000,000 impact due to the product retirements. Taking that into consideration, the underlying FX neutral EBITDA growth was about 9% in Amortization was flat sequentially after taking an expected step down in the fourth quarter last year as some of the acquisition intangibles reached their 18 month life. Integration expenses were down year over year as we've moved past the biggest part of the integration work. Interest expense, excluding deferred financing costs in the quarter, was $23,000,000, down from $28,000,000 in the second quarter of 2018.
The lower interest expense resulted from paying down roughly $250,000,000 in debt over the past year. The Q2 adjusted tax rate, which we used for the calculation of adjusted net income, was negative 3% for the quarter. The adjusted tax tax rate. The tax rate for the items used to Adjusted EPS in Q2 was $1.45 with upside relative to our expectations from below the line items including a lower than expected tax compared to $174,000,000 last year. The increase in operating cash flow was driven by lower interest expense lower taxes and contributions from working capital.
Q2 2019 CapEx was $39,000,000 and Q2 cash acquisition and integration payments and other non recurring items was approximately $8,000,000. This yields Q2 free cash flow of $197,000,000, which is up 25% versus the prior year quarter, normalizing 2018 for divestitures and working capital timing. On a rolling 4 quarter basis, our free cash flow conversion was 126 percent of adjusted net income, excluding divested operations and working capital timing. Turning to the balance sheet. Our June 30th debt balance was about $2,200,000,000 our debt is 100% fixed rate.
Adjusting EBITDA for the divestitures, our gross leverage ratio is now about 3.2 times EBITDA. We repurchased about $2,000,000 of stock in the quarter. We will continue to be price sensitive and opportunistic as we return capital to shareholders. We have about $870,000,000 remaining We deploy our free cash flow and balance sheet flexibility by returning capital to our shareholders through our buyback programs and through strategic value enhancing M and A Turning to the outlook for 2019. We've recalibrated our revenue outlook, modestly lowering the growth expectations and research including the non subscription piece, while increasing the expectations for conferences and consulting.
The top line growth outlook on an FX neutral basis remains strong. In addition, as we move through the first half of the year, we decided to make modest investments, most notably reducing the level of open territories in GBS. Our GTS and Conferences investments have been generating returns and we expect to see returns from the GBS investments as we move into 2020. As a result of these changes, we revised our outlook relative to our initial guidance. You think about modeling the operations for the rest of the year, we expect mostly typical seasonality for the quarterly phasing.
In addition, our guidance reflects FX rates as of June 30th. Due to U. S. Dollar strengthening, we expect FX to cause roughly 2 point negative impact for projected 2019 full year growth rates across revenue, EBITDA, adjusted EPS and free cash flows. Looking at our updated full year guidance, we expect revenue towards the lower end of the $4,200,000,000 to $4,300,000,000 range that is FX neutral growth of 10% to 11%.
This reflects research revenues of about $3,355,000,000 to $3,380,000,000. A reduction at the midpoint of about 2%. About half of the reduction is from non subscription products and services. As a reminder in addition to the non core businesses that we divested over the course of 2018, there were some additional products from the CEB acquisition that we viewed as non core. We've retired these, which is impacting our 2019 total revenue growth rate, which is impacting our 2019 total revenue growth rate, by about 75 basis points.
This is almost $30,000,000, about 2 thirds of which drops the EBITDA. Additionally, as Gene mentioned, our Q2 non subscription based revenues were lower than expected, and we expect this trend to continue for the rest of the year. We expect adjusted EBITDA of $670,000,000 to $700,000,000 FX neutral growth of down 1% to 4%. Some of the lower EBITDA reflects modestly lower revenue expectations. In addition, this reflects incremental operating expense of 1% to 2% versus our prior outlook.
As Gene mentioned, we decided to invest beyond our original plan to take advantage of the opportunities we see for increased growth. Most notably the reduction in open territories. We expect an adjusted tax rate of around 25.5 percent for the full year 2019. Please note that if you are adding back from GAAP net income, the rate for the tax effect on the add backs is also about 25.5%. Our full year tax rate remains unchanged despite the benefit in the second quarter.
Our tax planning related to our intellectual properties ongoing we anticipate incremental tax costs in the 4th quarter. We expect 2019 adjusted EPS of between $3.39 $3.64 per share, a range of down 7% to flat year over year. For 2019, we expect free cash flow of $400,000,000 to $430,000,000. That is a projected FX neutral change of down percent to site. For the third quarter, we expect adjusted EPS of about $0.40 to $0.45 per share.
As you build your models, remember that last year's third quarter EBITDA was very strong. This year, we have a larger cost base and the third quarter is a small revenue quarter, which magnifies the effect of costs. And finally, we expect our adjusted tax rate to be in the low 30s on a percentage basis. Through the first half of the year, we have delivered strong results across our business. Notably, GTS contract value growth continues to be strong and sales of our new GXL products in GBS continue to rise.
Our conferences and consulting businesses both had outstanding quarters. Free cash flow was up versus last year and conversion was stable. We were applying the Gartner Formula across the combined business to drive sustained long term double digit growth to revenues, EBITDA and free cash flow. With that, I'll turn the call back over to the operator and we'll be happy to take your questions. Operator?
Questions. Our first question comes from the line of Tim McHugh with William Blair. Your line is now open. Thanks.
I guess, just want to start obviously, I guess, on the revenue outlook for for the research business. First, the non subscription piece in the Q, you released kind of the point in time revenue. As one of the disclosures. And that number would be pretty or looks kind of consistent sequentially and was up 17% year over year. So Can you help us give a little more color on the non subscription piece being lower than you thought?
Because that would seem like a pretty steady and kind of healthy cross the number.
Hey, good morning, Tim. Thanks for the question. So on the research revenue, as you point out, a hunk of a reduction relates to non subscription revenue. There's a couple of factors going on there that are buried within the disclosure and the year over year growth rate you're seeing. So as you know, we retired a bunch of products at the end of 2018 and we're dealing with the impact of that in 2019 and that was contemplated in the original guidance.
On top of that, there were a number of non subscription products tied to GBS. That were not retired, but did not get the sales focus in the first half of the year as we've been driving real focus on GXL and subscription products. And so the revenue on those fell off faster than we had anticipated and we're baking that continued fall off into the balance of the year and that is obviously impacting the growth rate and the guidance a little bit. But more pronounced the outlook for the rest of the year. On top of that, there are some additional non subscriptions revenues which as you point out continue to perform very strongly, but have come down modestly from more elevated levels of performance in previous quarters.
Okay. And then just on the subscription piece of the guidance change, I guess the research revenue guide changed by roughly 2% and we only have half a year left. GTS's growth, I guess, I'm trying to reconcile the fact that against a tougher comps slowed down 80 dips, on why for half a year that drives a 2 point change in the full year outlook, or even if it's one point guess related to the subscription piece that would seem to be a bigger impact, than I would have thought, unless the original guidance assumed I guess, further acceleration in GTS?
Yes. Hey, Tim, it's a good point and you're right. Again, about half of the reduction related the subscription, half to non subscription. So about the 1% is a more accurate way to think about it. I think a couple of things.
So one is that with GTS, it's still performing really, really well 13.5 percent growth is very strong. And again, is up from where we were in 2017 and early parts of of 2018. It had been humming along at north of 14%. And obviously that modest slowdown we saw in the 2nd quarter has a flow through impact. And it's not just the quarterly impact and flowing that through.
We've also modulated the expectations for Q3 and Q4. And that had a modest impact on the outlook as well. And so it's really the essentially, and Jean described it, which was our outlook was for stronger total combined CV growth through the first half of the year were offset modestly. And that's causing that roughly 1% impact on subscription revenue for
Thank you. Our next question comes from the line of Jeff Mueller with Baird. Your line is now open.
Yes, I
guess on the the subscription piece just to follow-up. You mentioned some sales leadership for elevated sales leadership at GTS or maybe some execution hiccups. Can you just go into more detail on that? And to what extent do you view macro as a factor that could be impacting kind of both the small business non subs revenue as well as the GTS contract value deceleration?
Hey, Jeff, it's Jean. So basically as I mentioned, so as Craig mentioned, GTX-eight had great contract. 13.5% is very strong growth. It was a little off what we had expected. As I said, there were a number of small factors that individually wouldn't be a big deal, but happened to all hit at once.
So I'll just go through it. So first, we had some management, some leadership changes in GTS. We always have those. We happen to have greater than usual number. So for example, we had a leader running Asia for many years who needed to come back to the U.
S. For personal reasons. We had in Germany, we had our 2 top people that were running Germany got 1 got promoted and 1 went to GBS. We had changes in India for similar things. I've just got in as a bunch of and normally these would be more spread out.
It happened for a combination of business and personal reasons to be more concentrated in the first half. So that was one piece of it. 2nd piece I mentioned was an expansion at our Dallas and Barcelona offices. We as a company we grow, we need to have different talent pools We our European headquarters has traditionally been in the London area. Through a combination of Brexit and other talent markets, we've open the major office in Barcelona and again moved a bunch of people leaders and into Barcelona which was disruptive similar thing happened between Florida and Texas this year, we exited Dallas Office.
So again, these were planned
quite a bit of in
advance and just happened at the same time. And then I also mentioned we changed our approach to selling to very small tech companies. It's a there's a lot of innovation. Small Sentries are a great market for us and we reorganize slightly to make it more effective in selling to that market. Each of those things normally wouldn't have they're all small effects but then there are others but these are kind of the biggest ones.
Each of them were small but collectively resulting in that very minor change in our growth rate in subscription revenue. And it's all GTS basically.
And in your view macro is not a worsening factor?
We don't see it. If you look at our so if you look at our business, So our research GTS grew 13.5 percent GBS accelerated. I mean, our conferences business had a very strong order, one of the strongest quarters we've ever had, our consulting business had a very strong quarter. So across the business, we had really a lot of strength Now again, at any point in time, we have some companies that are doing really well. We have some of our clients that among the 15,000 enterprise clients, some they are not doing so well.
As you saw in our consulting business, there's clearly an uptick in interest and cost optimization. But again, all of our businesses had very strong performance.
Okay.
And then just, I guess, similar question given that it told me a half year effect on the magnitude of the EBITDA guidance. Reduction, any PFS kind of production. Is it should we think about some of this loss revenue being at like a near 100 percent decremental margin or just a very high decremental margin? And then on top of that, I guess the other factor is GBS sales headcount is going to trend higher because of the closing of the open territories or is Is that the right
way to think about it or
just I'm trying to understand the magnitude of it?
Yes, Jeff, I think, and good morning, Craig. I think that's the right way to think about it. So, for a portion of the revenue reduction it would have flowed through at very high margins. So basically cost base fixed. And when the revenue is there, it flows through very high margins.
Conversely when the revenue is not there, the hurt is large flow through margins as well. On some of the revenue, we were able to or are able to modulate the costs. But for the most part, they are it is a fixed cost base. And so your assertion on the large decremental revenue is appropriate. In terms of the cost I think you're right also.
Most notably, it is the reduction in open territories in GBS, but also a little bit in in GTS and in our copper sales, but most notably in GBS that is flowing through to the balance of the year. And I think the other thing worth noting is some of this some of the increased spending was baked into our Q2 outlook. At that point when we gave our guidance, we our view was we would make it up in other areas. And then obviously, as Jean mentioned, with a modest downtick in our revenue expectation, and this modest uptick in the cost. It caused us to recalibrate the outlook coming out of the second quarter.
Thank you. Our next question comes from the line of Manav Patnaik with Barclays. Your line is now open.
Thank you. Good morning, gentlemen. A follow-up on that, on the EBITDA guidance, I guess, you reduced that by about $50,000,000 to $65,000,000. Think you said that the non subscription or kind of legacy GBS stuff that you had was $30,000,000 that was a complete drop through. So is that the right way to think about it, $40,000,000 of that, is that drop to you talking about?
And is the rest of that split between the increased I guess investments in sales on the 2 GPS and GPS side?
Yes. Good morning, Manav. It's Craig. So, I think the way think about it, you're roughly right. And so as I mentioned, just before with Jeff, there's some portion of the revenue downside where it's not 100% flow through or actually able to eliminate or reduce certain costs.
But most of it is flowing through. And then the increased spending, again, most notably around faster growth or a lower proportion of open territories in GBS. So I think that is the right way to think about it.
Okay, got it. And then also just to the earlier question on the macro impact. And I think In your 10 Q, you usually have this language on double digit growth in contract value across your industry segments. And I think last quarter, it was three quarters. And in this quarter, you said it was half.
So is that just low large numbers? I guess just trying to use that point of follow-up and if you are seeing any slowdown deceleration in new segments?
Yes. I think the way to think about it is in GTS, where we've traditionally made that comment It's every client size, every major region and virtually every industry grew at double digit rates. The comment in the Q I believe relates to the combined GTS and GBS. And so that's going to be a little more mix just because we're combining a 13.5% grower with a 1% grower. But on the GTS side, the way we look at the measures, it's been very consistent where we've had that same level of almost universal double digit growth across every vector that you could
Our next question comes from the line of Toni Kaplan with Morgan Stanley. Your line is now open.
Thank you. So I wanted to clarify, are you still expecting to get to double digits TV growth in GBS by the end of the year? And also just in general, I know you made the change in GTS to selling to the small tech companies in terms of sales processes. But are there any sales processes that you're changing in GE BES or are you just given that GXL has been such a big transition? Are you just sort of seeing it takes time and just seeing how that goes?
Or are you sort of incrementally changing that as it goes along as well?
Hey, Tony, it's Jean. So, we are expecting double digit growth in GBS
by the end of this year.
We should expect that We obviously know what our results were for the first half. We have our bottoms up forecast for Q3 and we've looked at what we think new business and retentions likely in Q4 And that's what we're basing our expectation that we will still get to double digit growth by the end of 2019. So in on like I said, the results for the first half are positive forecast for Q3 and then our expectations on what would happen in Q4. That's the end of that question. In terms of sales process, the way that we've been handling GBS is let's make sure we get the right product line, which has got GXL in.
Let's make sure we get the right sales capacity, which we've got sales capacity. Let's make sure we've got the right selling recruiting, training, tools and processes in place. And the right retention programs. All those things now are in place and we've modeled them as we've talked in the past over what we've done very successfully for many years for GTS. And so while we may make some tweaks as we learn in terms of the processes, we really feel like we've got all the all of the pieces in place and that's why you're seeing the kind of really strong acceleration.
And as Craig talked about, we had $29,000,000 of new business in Q2 that was up 51% from Q1 for GXL. These products are really selling very, very well. And so we feel kind of a little bit of a
really good track there.
Great. And then I know I ask this question all the time, but given that EBITDA margins for this year at the midpoint guidance are about 160 basis points lower than last year, which was 100 basis points lower than the year before. I know there's sort of a major transition going on and the revenue growth hasn't come in as as the expense level right now, but what's sort of long term the right level for margins for the business? I'm not trying to say like where you're going to be this year or next year, etcetera, but just over time like what kind of margin level should this business support? Thank you.
Hey, good morning, Tony. It's Craig. So I think we're not going to give long term guidance on our margin expectation. I think Jean in his remarks outlined the way that we're all thinking about 2020 right now, which is will grow revenue at double digit rates, continue our trend of strength in revenue. And we'd expect EBITDA to grow approximately roughly in line with revenue next year.
We've obviously made a lot of investments in the business. Again, across GTS, GBS and Conferences, as we talked about, we really feel good about the returns we're getting in GTS and on the conference's side. We fully expect to start realizing those returns in DBS in 2020.
Our next question comes from the line of Gary Bisbee with Bank of America Merrill Lynch. Your line is now open.
Hi guys. Good morning. So if I look at the incremental the slight reduction in revenue and the incremental cost that the EBITDA guidance implies, even if we assume a much higher than corporate average margin on that revenue. And I guess acknowledging there's some mix shift within that with the higher margin revenue falling more than that total number. It still feels like there's like $40,000,000 of incremental cost coming in, which if we were to annualize that, it's like 4% of your SG And A in filling a few more open territories.
But can you just help us understand what's first of all, is that directionally right in what's really in that number? What are you investing in at such a high level in the back half of the year?
Yeah. Good morning, Gary. It's Craig. So, the way to think about it is you're probably a little high on your expense impact. It's probably a little bit lower think roughly in the $30 ish million range.
I think part of this is it's not all second half spending. The spending may have started in late Q1 certainly in Q2. And so annual you can't just double it to annualize it. Some of it is already baked into our our run rate for 2019. As Gene mentioned, with one example, where in one of our sales units, we reduced the level of open territories from 6% to 2%.
And so think of that as almost a 4% increase in the number of heads on board. And there's the frontline cost of those individuals And then if we have that many more people, we might need more managers, we might have needed more recruiters to actually get them and see etcetera. And so the move of reducing open territories, which we firmly, firmly, firmly believe absolutely pays off in the future. Does have a cost in the upfront. And I think that is not the only thing that's impacting that cost line.
Or the reduction in our EBITDA, but that is the most notable thing within that reduction. And so again, just think about what the size of our sales force is GBS is at 919 people. GTS is over 3200 people. Modest changes in against our assumptions in terms of percent of open territories can have a pretty sizable impact from a short term P and L perspective. But again, we firmly believe long term it pays off.
So I guess that leads to the follow-up, which is just how do you weigh on a day to day basis when you're running the business the concept of investing relative to delivering to your medium term targets, because this is now the 2nd year in a row, you won't hit that EBITDA growth target And, and despite being well within the revenue range that you're targeting And at some point and I know this growing frustration certainly for me, I think from a lot of investors in this concept of constantly investing so much, but yet really not showing a lot of return on investment because the level of reinvestment remains so high.
So, Gary, it's Jean. So first, if you look at our performance, again, GTS is growing really well. We've invested there. We've gotten great returns on it. Our Conferences business, the reason it has such rapid growth as we've invested there about great returns.
I've talked about in the past in GBS where that we've been investing ahead. We know we're investing ahead know there's great incredible growth opportunities there. And as I said before, we think we've reached that inflection point, we're going to start getting those returns in GBS as we have in GTS and in our conferences business. So as we and we're not deciding to make new investments per se. Again, as Craig said, the biggest factor on the cost side is that we We assumed a number of percentage of open territories.
It was significantly better than last year. We had an improvement last year. And it's across all three of our major sales forces. We're actually overachieving in terms of fewer inventories. That is great for the long term growth.
You've got not only get better growth to get better retention of existing clients. And so it's a great thing to do. And we already have those territories. So it's not incremental like we just decide one day to have a whole another investment So again, just summarizing, we've gotten great returns from GTS, the investments we've made great returns on GCS. And we're seeing we feel like we're at the beginning of getting those returns for GBS as well.
Thank you. Our next question comes from the line of Bill Warmington with Wells Fargo.
Good morning, everyone. So, a couple of questions on the productivity side. Within GBS, the productivity was minus 2000 in Q1. It was up to plus 7000 in Q2. The previous GBS guidance for double digit growth had implied in a productivity improvement to about $75,000.
And I wanted to ask, given the new guidance, what is implied and the new guidance?
Hey, good morning, Bill. So there's really no change, in the way to think about the productivity. The way we measure it is opening period headcount And so again, to drive the roughly 10% growth on a $600,000,000 just below $600,000,000 base, we have to drive the same level of NCVI and our opening number of headcount hasn't changed. So essentially it's the same math You're right in your calcs for Q1 and Q2. And again, we believe through a combination of improved retention rates.
And what we've seen in both Q1 and Q2 is very favorable. I think we've said in Q1 for the contract that came up for renewal, we were up close to 200 basis points, in terms of the pure retention on those transactions. Same measure in Q2, we were up 2 seventy basis points. You'll note that Q2 new business for GBS in total was up 16% year over year. That's coming off several quarters of a decline new business on a year over year basis.
And so again, if you kind of model forward, improve the continued improvements to retention and continued ramping of our new business. Again, as the sales force seasons, as they get more comfortable selling GXL, as we get real momentum on GXL, that's the way we think about the path to still get into that double digit growth in GBS by the end of this year.
Okay. And then on the thank you. On the GTS side, the productivity last quarter grew 9% versus a 13% comp in this quarter. Productivity grew 2% versus an easier 10% comp. And I thought initially that that might be the more rapid closing of the open territories than expected.
But it sounded like a lot of that was really on the GBS side. So I wanted to ask what was what was driving that lower productivity? Yes, sure. So,
we as you know, we did have a modest deceleration in the GTS overall contract value growth rate. And again 13.5 is still very, very strong and the productivity is still up 2% on a year over year basis. But given the modest deceleration in the quarter, that's really what caused a modest deceleration in the productivity. And again, we're up it was 7th consecutive quarter of productivity being up on a year over year basis, but the modest detail impacted the productivity measure or said the other way, the productivity measure impacted a modest T cell. You can look at it either way, but that's really what happened in the second quarter.
Got it. Okay. Thank you very much.
Thank you. Our next question comes from the line of Jeff Silber with BMO Capital Markets. Your line is now open.
Thanks so much. Sorry, but
I just wanted to go back to the margin expansion question from earlier. If we look at 2020, it looks like your soft for flat margins next year. I would have thought if we're ending this year at double digit CV growth in GBS, you're talking about that potentially accelerating next year. We're off the headwinds from the shift away from the legacy business. You're filling your open territories a little bit quicker than you thought.
Why shouldn't we see more a little bit of margin expansion next year?
Good morning, Jeff. And thanks for the question. So again, we're not giving 2020 guidance at this point. Obviously, a lot of it will be turbend upon where we land the year. So the bulk of our 2020 economics are determined by the contract value growth or the NCVI we deliver in both GTS and GBS through the second half of the year.
I'll be happy to go into immense and infinite detail around our EBITDA growth assumptions when we give 2020 outlook. And we'll certainly provide all the visibility and transparency in terms of being able to walk and reconcile the points you make. We're just not in a position right now where we're talking about the 2020 guidance or the margin outlook moving forward.
And Jeff, I'd add that, the reason I had that in my comments was that we wanted to communicate that we know we've been investing ahead of the ahead of CD growth in GBS and that we feel like we've reached a point now where we have the right base. As I talked about earlier, bright number of sales people, the right products etcetera to where we can start getting returns out of that which is what we're trying to communicate as opposed to specific guidance when the markets are going to be year.
Okay. Look forward to getting more detail as the year progresses. And then just a quick numbers question. You mentioned the the tax benefit impacting adjusted EPS in 2Q. What was the exact amount of that tax benefit impact on EPS?
So roughly speaking, Jeff, I think it was about a $38,000,000 benefit recorded on the income tax line.
Okay. I can back into the EPS number. All right. Thanks so much.
You got it.
Thank you. Our next question comes from the line of Joseph Perez with Cantor Fitzgerald. Your line is now open.
Hi. So I just wanted to kind of circle back to GXL. What do you think the Street is undervaluing, that would result in the ramp necessary to hit that that double digit growth? What do we not see sort of on the outside that you see on the inside from either a product improvement standpoint or some other area?
Hey, Joe, good morning. It's Greg. Good morning. Joe, I think it's we've always had confidence in the quality of the product. It really is a a very strong high value proposition at a relatively low cost product, very consistent with our IT products, our supply chain products and our marketing products.
And I think what really gives us confidence is two things. So one is the continued ramp of GXL new business. And again, that's one of the reasons why we've consistently been breaking that out for investors so that investors can see the progress we're making. And again, it can get a little masked in the total numbers because there's a lot of moving parts. But when you isolate out what's happening with GSL, particularly on the new business side.
In the second quarter, we sold $29,000,000 worth of new business and that was across every enterprise function where we've launched the new GXL product. And if I look at the growth on a year over year basis across all those enterprise functions, the growth was very strong. As Gene mentioned, overall GXL new business growth was up 51% year over year. And in just about every enterprise function, we were close to that average. So very, very strong growth.
So the market uptake continues to be strong. And again, our sales teams continue to get more and more repetitions, if you will, of selling the product and they're just getting better and better and better at it. You couple that with the improvements we've seen in retention. And that comment is both on the GXL retention and also on legacy product retention. And again, we've seen very strong things that have come up for renewal in the first half of the year a very strong improvement in our retention rates.
And again, if you flow that through, which we believe should flow through for the balance of the year and you continue to ramp up on the GXL. And again, given we're not selling 1(2)s each of these things, we're selling 1,000,000 and tens of 1,000,000 of dollars of each and every quarter. That's really what we're seeing underneath the covers. And again, we're trying to make that as transparent as possible as well.
Got it. And then just as a follow-up, maybe you can just remind us of the investment schedule, in GXL. What what are you currently investing in? Do you feel like you've made the proper investments at this point? Because I know that we a couple of I think it goes back to after the closing saw a spike in investments and a pull forward and all the rest of that stuff.
So maybe you can just help us with the investment schedule. Are you investing in now? Do you feel like the investments are now complete? Are they continually ongoing? Is it mostly in sales?
Just a little bit more color CapEx that you're putting back into the business? Thanks.
Hey, Joe, the largest single investment is the sales force. And the we've added to sales capacity because that's key to getting long term sustained growth. And we've got that in place. Now what we're doing is seeing and again as the business grows that will continue to grow. We've also invested and getting the right products in place, the right service delivery team so retention gets up and all of those things as Craig mentioned are working, meaning GXL is selling very well.
Retention of the first ones of comfort renewal have been very strong. The retention programs are also affecting the legacy products as well whereas mentioned our retention is up there as well. And so the key investments that really are in based single one is in sales to a lesser degree in service delivery and in product.
Thank you. Our next question comes from the line of George Tong with Goldman Sachs. Your line is now open.
Your GTS headcount growth in the quarter accelerated to 14.5%. I recall previously you were looking to slow your GTS headcount growth in rely more in productivity gains to drive CV growth. So can you talk about your overall strategy in GTS between balancing headcount growth and productivity gains over the next call it 2 to 4 quarters?
So George, I'll answer the first half of the question, which is So our the way we think about adding capacity to our sales force is that we decided a number certain number of territories we want to add each year and the phasing of adding those territories through the year. And then we assume that there's a certain number of opens that we talked about. And so story in GTS is the same as we talked about in GBS, which is we gave you the guidance we gave you on the sales force headcount growth was based on the number territories. As credit I mentioned, we've actually reduced the number of sales territories in GTS as well as in GBS And that's why the sales growth the sales force growth is a little higher because we're not giving you the number of territories, giving you the number of actual people on board.
Yeah. And George, good morning. Just to continue the thought and answer the second part of your question. So it's not a change in our territory growth assumptions, it's we were just more efficient and more effective at filling open territories and we had that many that 14% more heads on board compared to where we were last quarter. And it's modestly a point or 2, above what we had guided for the full year.
For the next few quarters, we expect to run roughly in this range given the low level of open territories and the same level of territory growth. Again, we are we remain focused on driving increased sales productivity consistently. As we mentioned, we've done it 7 quarters in a row of year over year productivity improvement. We'll continue to be focused on striking that right balance between headcount growth and productivity improvements. And again, as we accelerate on GBS.
I think we'll employ that same kind of thinking the way we want to get productivity but we also want to make sure we add so that we can go capture that huge market opportunity and drive sustained long term double digit growth.
Got it. That's helpful.
And then with respect to the open territories, can you confirm that most of the upside in filling those territories infant come from GBS and perhaps quantify maybe the number of open territories that you filled versus what you had initially expected? And how you expect the better filling of these territories to impact sales over the next year? Yeah. Sure, George. So the way to think about it is we've actually if you look at our 3 major selling unit.
So GTS, GBS, and then the sales teams that sell the conferences. We've reduce the level of open territories in each of those segments. And again, you could argue in GTS We're seeing the benefits of that and that return is paying off. In conferences, we're seeing the benefit and in GBS, we're starting to see contract value growth accelerate. And as Jean mentioned, we really expect to start seeing the returns from all those investments in 2020 and beyond.
The way to think about it just quantitatively is we've planned. We've historically had roughly 5% open territories in GTS and GBS. And so, a 2 or 3 point reduction in open territories can impact the headcount growth by that same 2% or 3%. And so as we've moved through this year in particular, we've been really efficient and effective at filling open territories at a faster rate than we had previously. On the GTS side, it's probably a couple of points better.
On the GBS side, it's a little more notable in terms of more than a couple of points better. And again, each of those improvements is accreting the growth rate that you're seeing in headcount. And now that we fill those territories, we expect to kind of run at that level, at least we've baked into our outlook running at that level for the balance of the year.
Got it. Thank you.
Thank you. This concludes today's question and answer session. I would now like to turn the call back to Mr. Gene Hall for closing remarks.
So summarizing today's call, for the second quarter of 2019, we continue to deliver strong performances across our business. We again delivered double digit growth in each of our business segments research conferences and consulting. We are well positioned for sustained double digit growth We expect continued sustaining double digit growth in GTS, rent an inflection point in GBS, and conferences consulting are on a strong path. Our future Greta remains bright. Thanks for joining us today and we look forward to updating you again next quarter.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.